Were you aware that there are 30 distinct levels of credit scores? Many individuals are unaware that searching for the best credit score can result in varying responses from Google. The information that one may come across can often be perplexing and even generate confusion, leading to a negative outcome. With over fifteen years of experience in the financial literacy and credit repair field, I am Joe Mahlow, and I strive to provide you with truthful feedback on various topics, one of which being credit scores. My objective is to equip you with the necessary information to achieve an improved credit score as I have helped over twenty thousand clients elevate their credit scores. Let's dive right into it.
Contents:
Different Credit Scoring Models: FICO and Vantage
A Guide to Good Credit Score Ranges
House Buying and Credit Scores: Which Score Do You Need?
Credit Score Impact on Car Loans
Tips for Improving Your Credit Score
Key Takeaways from Joe's Thoughts on Credit Improvement
Different Credit Scoring Models: FICO and Vantage
Credit scores are essential to understanding your creditworthiness. There are two primary credit scoring models: FICO and Vantage. Both models are crucial to understanding because of their differences in calculating credit scores.
FICO Credit Scoring Model
FICO is the most predominant and widely used credit scoring model. With FICO 2 to FICO 10, it can be confusing as you may get different credit scores depending on your credit report. When applying for credit, the type of lender decides on which FICO report to pull. For example, a mortgage lender will most likely use Fico 5 credit report, while a credit card company may use Fico 8. Each FICO model weighs credit factors differently for different types of creditors, which affects your credit score.
Why So Many FICO Scores?
Each credit report carries a different weight, implying that essential factors influencing a credit score have a more significant impact than less important ones. For example, a FICO 5 mortgage report has a more significant emphasis on previous mortgage history. On the other hand, the FICO 8 report used by credit card companies is heavily influenced by your previous credit card history. The same applies when auto lenders use FICO-2 reports.
You can have a better understanding of the different FICO scores by signing up for an account at www.myfico.com.
Vantage Credit Scoring Model
The Vantage Score model was developed by Equifax, Experian, and TransUnion credit reporting agencies. It was created to compete with the FICO model, which has been used since the seventies. Although not widely used for lending purposes, Vantage scores are often used to give you a free copy of your credit report by credit monitoring websites. It is slowly gaining popularity in sectors such as personal loans and auto lending.
Is the Vantage Score Accurate?
The Vantage Score is accurate when used in context. FICO is currently the universally accepted scoring model, making it the most reliable when it comes to your lending score. Vantage scores give you a good "general idea" of your FICO score. Like any scoring model, its accuracy fades based on where the score is used. The Vantage scoring model is gaining popularity and may become widely used, providing the best scoring models based on today's standards.
Finally, credit reporting agencies are the most significant data collection agencies outside social media companies. They are best placed to provide the latest scoring data for creditworthiness.
A Guide to Good Credit Score Ranges
When it comes to credit scores, both the FICO and Vantage scoring models operate on a 350 to 850 scale. A score of 350 is considered the worst while an 850 is the best that one can achieve. However, to achieve a high credit score, it’s crucial to understand the various score thresholds involved in the process. Here are some essential credit score ranges that you need to know.
1. 620 or below
If your credit score falls within this range, you have bad credit and must have an adverse credit history. It could also mean that you have high-balance credit card accounts or no credit cards at all. In such situations, it's best to make timely payments and have at least ten active revolving credit accounts open. The Credit Builder Card and OpenSky Credit Card are great secured credit cards that can help you build your credit score. Once your credit score hits the 620 credit score threshold, you can start qualifying for an FHA home mortgage.
2. 640-680
If your credit score lies within this range, it's considered fair for good credit. A score within this range shows you have established credit, but it could also mean you have derogatory marks or accounts on your credit. You may also have high balances on your credit cards that you need to pay down. A temporary decrease in your scores could be due to newly opened accounts, but the scores will return to normal soon.
3. 740+
If your credit score is over 740, you have attained a "super-prime score." This means you have the best interest rates for most loans. A score of 740 or more puts you among the 20% of Americans who enjoy this benefit. If you have a score of 740 or higher, you're doing great, but make sure to maintain the score by paying your accounts on time, and keep your revolving credit card accounts current.
House Buying and Credit Scores: Which Score Do You Need?
The required credit score to purchase a home depends on the type of mortgage you are looking to qualify for. However, the guidelines and prerequisites for most mortgage loans remain the same, thanks to government backing and federal regulation. The three most common mortgage loan categories include conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most favored and best choice as a "savings" loan when compared to VA loans. Additionally, this loan option does not mandate that you maintain private mortgage insurance (PMI), which can turn out to be an extra cost adding to your monthly payments or downpayment. PMI is included to provide protection to the lender in case you fail to make your loan payments. Beyond that, conventional loans usually have reduced downpayment requirements and better interest rates than other mortgage loan categories. Conventional loans mandate a credit score requirement of 640 and a debt-to-debt ratio that is not beyond 43 percent.
FHA Loan
The minimum credit score requirement for FHA mortgages is between 580 and 619. It is crucial to bear in mind that every loan program is different, so always shop around for the best lenders if you are in the credit score limit. FHA loans need PMI for at least 11 years, which is an extra expense, so bear that in mind when working with a budget. The loan also tends to have a higher debt-to-income limit of 50%, allowing you to purchase more homes than with conventional loans if you have a lower income. Finally, downpayment requirements for an FHA loan can be as low as 3.5% of the purchase price, enabling you to obtain a mortgage with less money out of pocket than a conventional loan, but with a higher interest rate.
VA Loan
There is no standard credit score requirement for obtaining a VA loan; however, lenders may consider your previous defaulted loans or any past-due debts owed to the government when pre-qualifying you. Additionally, you must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or have been married to military personnel who died during active duty. The VA loan has the best interest rates available, and lenders usually do not necessitate a downpayment. The VA loan is an excellent way to recognize the significant service of our veterans.
Credit Score Impact on Car Loans
When it comes to buying a car, your credit history weighs more heavily than your credit score in determining what type of loan you qualify for. Although a higher credit score is beneficial, it has less impact on the interest rate you qualify for. During a car loan application process, lenders assess your current and past credit histories to determine your credit risk. Previous late payments, auto loan defaults, or vehicle repossessions could make it harder for you to get loan approval. Even with terrible credit, auto loan providers may qualify you, but usually with elevated down payment requirements and additional dealership fees. A down payment could significantly improve your leverage for loan approval. Although there isn't a precise credit score that will guarantee loan approval, a credit score above 680 is more desirable. Any score below 680 could increase the interest rate on the loan as it poses a higher risk to the lender. In general, the interest rate decreases with a higher credit score. For example, a credit score over 720 could mean paying around $5,500 in interest on the loan, while a credit score of 580 or below could result in paying $15,300 in interest on the same loan. Therefore, maintaining a high credit score is essential in obtaining the most favorable terms for your car loan.
Tips for Improving Your Credit Score
Improving your credit score takes time; it is not an overnight process. Practicing patience is essential because impulsive decisions can worsen your situation. Nevertheless, you can take several steps now to enhance your credit score effortlessly.
Below are a few strategies to increase your credit score:
1. Open 3-5 Revolving Credit Accounts
Revolving credit, such as credit cards, is an efficient way to maximize your credit score. For individuals starting with limited credit or rebuilding their credit, a large loan can be challenging to obtain. On the other hand, a secured credit card like Open Sky or Credit Builder Card, which assesses your ability to pay the card on time rather than your credit score, could be ideal for you. Revolving credit accounts make up to 30-35% of your total credit score. However, it may take 2-4 months to reflect an increase in your credit score. Make sure to pay your balance on time and use your card for small purchases only.
2. Request a Credit Limit Increase
Requesting a credit limit increase for your active revolving credit accounts can significantly increase your overall credit limits and reduce your credit utilization percentage. You can do this through the online portal or by calling your credit card company. Typically, a credit card company requires you to have 7-15 months of excellent payment history before they agree to increase your credit limit.
3. Pay Down Your Balances
Maintaining your balances low and close to zero can help you increase your credit score. If you have high balances and do not have the financial capability to pay your credit cards off, it is best to create a payment plan that ensures gradual payment each month until you pay off your credits. Avoid running your balance back up after paying off your credit card because your credit card spending habits significantly impact your credit score, and a high-interest rate can also make this detrimental to you.
Key Takeaways from Joe's Thoughts on Credit Improvement
Having less-than-perfect credit is a common issue that many individuals face. The good news is, with dedication and effort, you can start improving your credit score right away. Unfortunately, many people fall into the trap of accepting their poor credit as a permanent situation. The truth is that working hard to build better credit habits and a positive credit score takes time and effort. By prioritizing your credit and focusing on good spending habits, you can turn your credit score around. A good place to start is by creating a budget and identifying bad spending habits to eliminate from your routine. This article aims to educate readers on credit improvement. If you are seeking advice and professional aid for credit repair, reach out to our office today at www.asapcreditrepairusa.com.
Key Tips for Credit Improvement:
1. Prioritize your credit and commit to developing good spending habits
2. Create a budget to monitor expenses and identify areas for improvement
3. Seek professional guidance for credit repair if you need assistance in improving your score.